Canada Monetary Policy April 2016

Canada: Bank of Canada holds policy rate at 0.50%

April 13, 2016

At its 13 April policy meeting, the Bank of Canada (BoC) decided to maintain its target for the overnight rate at 0.50%. The decision was largely expected by markets. The move signals confidence that the government’s planned fiscal stimulus should provide adequate support for the economy while it struggles to gather momentum after experiencing slow growth in 2015.

In its accompanying statement, the Bank noted that the global economy is growing more slowly than the Bank had expected. The U.S. economy has appeared to have struggled in the first quarter of the year; however, recent indicators show that it is picking up steam again, but will not expand at the same rate as seen in the past year. Accommodative monetary policy among major economies persists.

Commodities prices have rallied in recent months, but remain below their historic averages, thus indicating the Canadian economy will have to endure further contractions to investment in its energy sector. The price increases have boosted the value of the Canadian dollar.

Canada continues to adjust to the negative shock in commodities prices. The Bank noted the Q1 2016 GDP growth appears to have been strong, but cautioned that this may be due to transitory factors and will likely not be reflected in the second quarter. The economy is pivoting toward greater importance for manufacturing and non-resource exports. However, it is unlikely that such exports will fully compensate for the collapse in the more lucrative resource sector. The appreciatory trend of the Canadian dollar could also compromise export growth. Investment outside of the resource sector is expanding, and should lift total investment out of contraction later in 2016. Inflation is currently below the Bank’s 2.0% target, but is expected to increase as price decreases associated with last year’s fall in energy prices dissipate.

The BoC stated that it sees risk to inflation as being balanced. It also elaborated that the current readjustment was complex, stating that, “financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.” The next monetary policy meeting is scheduled for 25 May.

FocusEconomics Consensus Forecast panelists see the policy rate at 0.72% at the end of 2016. For 2017, panelists expect the policy rate to rise to 1.37%.

The Ivey Purchasing Managers Index (PMI), prepared by the Richard Ivey School of Business, declined a seasonally-adjusted 2.6 points from November to 60.4 in December—coming in below the 62.2-point reading that market analysts had expected.